Medical Loss Ratio: Getting Your Money's Worth on Health Insurance

Thanks to the Affordable Care Act, consumers will receive more value for their premium dollars because insurance companies are required to spend 80-to-85% of premium dollars on medical care and health care quality improvement, rather than on overhead costs. If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012. This policy is known as the “medical loss ratio” (MLR) provision of the Affordable Care Act.

Medical loss ratios apply to all health insurance plans, including job-based coverage and coverage sold in the individual market. However, insurance plans in the individual market often spend a larger percent of premiums on administrative expenses and non-health related costs than job-based health plans do.

Recognizing the variation in local insurance markets, the Affordable Care Act allows States to request a temporary adjustment in the MLR ratio for up to three years, to avoid disruptions to coverage in the individual market. This flexibility allows consumers to maintain the choices currently available to them in their State while transitioning to a new marketplace where they will have more options for coverage and more affordable health insurance through State-based Health Insurance Exchanges. This is one of many ways the Affordable Care Act is building a bridge from today’s often disjointed and dysfunctional markets to a better health care system.

HHS has set up a transparent process for how States can apply for an MLR adjustment and what criteria will be used to determine whether to grant those requests. States must provide information to the Department of Health and Human Services (HHS) showing that requiring insurers in their individual market to spend at least 80 percent of their premiums on medical care and quality improvement may cause one or more insurers to leave the market, reducing access to coverage for consumers. States must also show the number of consumers likely to be affected if an adjustment is not granted and the potential impact on premiums charged, benefits provided, and enrollee cost-sharing. All State application materials are posted on the HHS website.

The Guam MLR Adjustment Application

Guam's Department of Revenue and Taxation requested an adjustment to the MLR standard for 2011 to 2013 of 65 percent for Guam’s individual market, 70 percent for Guam’s small group market, and 80 percent for Guam’s large group market. 

The MLR statute and regulation only give HHS the authority to grant an adjustment to the MLR standard in a State or Territory’s individual market.  Therefore, CCIIO cannot act on Guam’s adjustment request with respect to the group markets. 

Guam’s individual market is very small.  It has only two issuers which together covered fewer than 350 life-years in 2010.  Under the MLR statute and regulation, an issuer with fewer than 1,000 life-years is considered “non-credible” and is “presumed to meet or exceed” the relevant MLR standard.   Therefore, both issuers in Guam’s individual market are presumed to meet the MLR standard this year and mostly likely will for the next several years. 

Because all issuers in Guam’s individual market are presumed to meet the statutory MLR standard, there is no reason to act on Guam’s request for an adjustment.